Why China's Subway Boom Went Bust

Since the turn of the millennium, China has been experiencing a subway boom.

Beijing only managed to finish two subways during the days of China's hardcore communist regime, with a few more built after Deng Xiaoping's market reforms. The real work started when China won the right to host the 2008 Summer Olympics. Beijing built five new lines by 2008, and has opened another eight since the Olympics. A dozen new lines and extensions are scheduled to open in the capital by 2015.

Meanwhile, smaller Chinese cities are racing to open their first subway lines. Kunming, a city of 3.2 million in Yunnan Province, is the latest to open its first line, but its name – "Line 6" – may turn out to be a bit optimistic.

In 2011, as China's seemly unstoppable economy began to sputter, the subway boom turned bust. In early January 2012, Caixin quoted Zhang Jiangyu, vice director for the powerful National Development and Reform Commission's transit technology planning office, as saying that 70 to 80 percent of China's planned rapid transit lines are being "postponed."

And last month, the other shoe dropped: China's subways are insolvent.

Ying Minghong, chairman of the company that owns Shanghai's fast-growing Metro, told China Daily that of the city's 11 lines, only one makes anything resembling an operating profit.

And that's just on paper. Yang Di, a manager at Shanghai Metro's parent company, told China Daily that only what he termed "optimal resources" were officially counted on balance sheets. Referring to the tangled web of ownership and operations of Shanghai Metro, he said that "it is impossible to know the exact scale of their losses."

Jin Yongxiang, a general manager at a Beijing subway consultancy, estimated to Caixin that "the liability of subway projects nationwide adds up to more than 1 trillion yuan," or $158 billion. "From a macro perspective, that's a huge debt burden."

To a Westerner, these numbers don't seem too scandalous. Rapid transit systems in Europe and North America rarely make much more than 50 percent of their operating costs back in revenue, and new lines are built with the understanding that they will require subsidies to operate.

But in a developing country surrounded by the world's best transit systems, profits – enough to cover operating expenses, at least – were expected.

Passengers board a train at a subway station in Beijing. (Jason Lee/Reuters)

The Chinese-speaking city-states of Hong Kong and Singapore boast profitable and quasi-private rail networks, and even Taipei Metro has made operating profits. China's main Asian rival, Japan, has long boasted profitable private suburban railways, with its major government-owned subway systems also posting profits in recent years.

Much like New York's old five-cent fare did in that city, low ticket prices have exacerbated financial problems for Chinese metros.

Beijing Metro is perhaps the most underpriced, charging 2 yuan, or 30 cents, for all trips. Hangzhou Metro is considering a variable pricing system for its newest line in which the highest fare will be either 8 or 9 yuan, but the numbers still won't work out.

"No matter which of the two pricing proposals we adopt," a general manager at Hangzhou Metro recently told The Economic Observer, "the subway company is going to make huge losses."

The Shanghai subway. Photo credit: Carlos Barria/Reuters

Part of the problem with China's subways is their cost. At 500 million yuan per kilometer, or about $80 million, their pricetags are not that much cheaper than they are in Seoul, where wages are much higher.

Land development is also a problem for China's metros.

Caixin quoted a "rail construction industry insider" as saying that government officials often choose to build more expensive subways over cheaper elevated or at-grade rail lines (often incorrectly referred to as "light rail" by Chinese writing in English) to leave more land to exploit. "In the eyes of city officials," Caixin wrote, "land equals money."

Hong Kong's MTR and Japan's many profitable railways rely on real estate investments to finance some of their operations, but their profitability does not depend on it. And development deals outside of China are long-term and sustained, whereas local governments on the mainland use volatile, one-time land sales to finance railway operations.

Then there's the issue of safety.

After the Shanghai Metro crash in September 2011, state media reported that the trains were being dispatched by telephone after the signals failed. A number of sinkholes have formed across the country as improperly reinforced subway projects cave in.

Firemen help evacuate a victim outside the Yuyuan Garden station after the 2011 subway crash in Shanghai. Photo by Carlos Barria/Reuters

In early railroading, safety was often sacrificed for speed and cost savings. But today, the three can go hand in hand. Spain's rail projects have not only been incredibly cheap, but also very quick and safe. China's safety lapses are more likely due to poor planning and corruption.

Now that China's voracious subway-building machine is slowing down, the central government is also looking to trams as a cheaper alternative for cities that can't afford costly subways.

Last month the China South Locomotive & Rolling Stock Corporation announced the completion of "the world's first super-capacity light rail" train, which it claims has a battery that "can be fully charged within 30 seconds during its station stops." This would allow it to dispense with overhead pantograph and catenary wire.

But China isn't done building subways and elevated rail. Last week,the NDRC approved 25 new metro projects as part of a stimulus package, along with a few intercity and high-speed rail lines.

How those subways and elevated urban rail lines will fund their operations is an open question.

Raising fares and streamlining operations will be necessary if China's metros want to maintain profitability. Otherwise, China must acknowledge that subsidies will be an ongoing expense, and take them into account when planning new lines. If, that is, they can afford it.